Ben Sammut Mortgage Agent Discusses Millennials. What millennials need to know about getting a mortgage. How to accept family gifts for down payments. How to buy a house in this competitive market.
Davelle: Welcome to the Morrison Report. I really wanted to create a podcast that would give people insights into the Toronto real estate market. You can follow me on Twitter @DavelleMorrison and on Instagram as Davelle Morrison, and you can also like my business page on Facebook. On today’s episode, we have Ben Sammut with us. He is a mortgage agent with Mortgage Architects. He’s also a millennial. So today we’re gonna be talking about issues affecting millennials and their mortgages, so join me speaking with Ben.
So Ben, tell us, what are some of the most important things for millennials to know and do about getting a mortgage?
Ben: Well, I think it first and foremost starts with the fact that we need to differentiate ourselves from the American market. Usually what happens is a lot of millennials are getting the news from these dismal housing markets going on in the States and dismal job markets, and while the job market is a little different nowadays from what our parents had, mortgage financing is a bit of a different animal down there. So, we don’t need to be as discouraged, and I always start with just, just start with a plan. See where you are now.
Davelle: Cool. Awesome.
Davelle: That’s great advice. So, someone comes in to see you. What’s the first thing that you take them through or you do with them?
Ben: So, the process of pre-approval is pretty straightforward. It’s the same with a mortgage broker that it would be with the banks, but sometimes a little bit more detailed. So, we’ll have a first, or a primary conversation, just to go through their needs. We see what they want to do, see if their expectations are realistic, and then from there we just try to find the perfect fit between their income, their debt ratios, what their credit can afford them, and then really what kind of options they can pull on from there. So, if Mom and Dad are able to help, if there’s anything like income suites that we can look at, and I’m sure we’ll speak to that a little bit later on, but we really just want to make sure that all options are explored for them, so that they’re realistic when, by the time they’re ready to go out with you, they know what they’re looking for.
Davelle: So, before they come and see you, would you suggest that they pull their credit history beforehand so they have an idea of where they stand, or is that something that you would do for them?
Ben: It’s something that we do. One of the benefits of working with a broker is that we’re able to only pull one bureau and then present that to all of our banks. So, there’s a common misconception that multiple pulls on your credit bureau can damage it pretty badly. It’s true that if you pull a few bureaus for, let’s say, a car loan, then a student loan, credit card, mortgage, things like that, it’ll affect your credit score negatively. But, if you’re just checking in and you take one of those consumer reports that are offered free through certain websites, it doesn’t hurt for you to know but we’ll be able to give you a much better analysis anyways, so … You’re really free to do either way, but we’ll certainly make sure you know what’s going on.
Davelle: So, what are things that you might want to suggest that millennials could do now to make sure that they have a good credit history, before they come and see you?
Ben: One of the things that I would definitely advise against is applying for multiple credit cards. So, I have plenty of friends my age and slightly older that would always get free newspaper subscriptions or boxes of cookies or Raptors tickets for signing up for a card that they never use, and they think because they never use it that it’s never going to affect their credit score. But there is a portion of your score calculated based on the amount of credit you have available to you, and I think a lot of people don’t realize that it’s not good to have $10,000 in unsecured debt available that could cripple you at any moment, if you’re looking to apply.
So I say, the best thing to do is start off with one credit card. Make sure you’re keeping on time with your payments, and then from there, just establish a good repayment history. As brokers, we’re able to tell you which are gonna really help out your credit score, which ones not so much. So as long as you’ve got somebody who’s somewhat financial savvy to advise you and tell you exactly which ways to move forward. The main concern is just that you are actually thinking of your credit score.
Davelle: So, what if you’re the kind of person that doesn’t want to have a credit card at all, and you want to pay cash for everything? How’s that going to affect their credit score?
Ben: Well, it really isn’t. It’s not going to do any damage to their credit score, but when they go to apply for a quarter of a million dollars in a mortgage, and they don’t even have any repayment history on a $2,000 credit card, it’s a little difficult for banks to learn to trust them. So, you’re almost better off taking on a little bit of debt and establishing a good payment history before you actually try to take on larger debts like car loans and mortgages, because if you pay cash for everything, you’re trying to establish a cash-only standard and it’s just not really possible in mortgage financing.
Davelle: Yeah, I could see that. It’s funny, when I went to university, I had all the credit card companies all over me. “Hey, you’re in university now, so apply for a credit card!” And I did. But it’s a good thing I did because I have them now. But I recently worked with a client who was looking just to get a rental, it wasn’t even for a mortgage, and when we looked at his credit history, we realized it wasn’t very high and one of the reasons was is he just believed in paying cash for everything. So I told him, you know, you better go out and get yourself some credit cards. This cash thing doesn’t work.
Ben: Yeah, it can sometimes do more harm than good.
Davelle: Yeah, absolutely, for sure.
Ben: Mm-hmm (affirmative).
Davelle: So, now what about millennials who are getting help from the bank of Mom and Dad, or other family members for mortgages? Is there something they should know about getting those kinds of gifts?
Ben: Yes. So, actually, the bank of Mom and Dad is a fairly new phrase. That actually only came out a few years ago, as far as I know. But it’s becoming so prominent now that I’d say, probably about 40 to 50% of our buyers that are under 35 use funds from their parents today. So, if money is coming from your immediate family, that’s fine. The banks are perfectly okay with money coming from mom, dad, or siblings. But as soon as you start to extend beyond that, so if you’re borrowing from aunts or uncles, family friends, or just friends, the banks don’t really allow that because it’s not close enough of a relationship, so they start to look at that as a personal loan. The only allowable gifts are from immediate family.
Davelle: Interesting. So would you say that, what about, do those gifts have to be in their bank account for a certain amount of time for them not to be considered a personal loan?
Ben: It’s gonna depend on the bank that we take them to. We work with about sixty different lenders, so each bank has their own rules and regulations behind that. Usually, what we try to do is just establish that the money is in fact in the parent’s account, so that way on the day of closing, they can just bring the funds to the lawyer and the lawyer will amalgamate all funds. Some banks will want to see the gift transferred to you either 15 or 30 days, and then under certain circumstances, so if you’ve got Mom and Dad living in the States or if they’re living abroad, depending on where your parents are, they might want to see them anywhere between 30 or 90 days into your account.
Davelle: Interesting. So, I mean, you had sort of alluded to this earlier where you said, you’re probably seeing around 40% or so of your millennials that you’re working with are getting money from family help. I noticed there was a recent study in Canadian Business Magazine that said that 65% of millennials rely on family to help them get their down payment. But in your case you’ve noticed the, your percentages are a little bit lower?
Ben: They’re a little bit lower, but I think it’s just the type of clientele that we work with. We tend to specifically focus within the downtown Toronto core and some parts of the GTA. But when you’re looking at that data, Canada-wide it’s gonna be a little different if you’re comparing markets for, let’s say, Sudbury or North Bay versus Windsor or other parts outside of the city.
Ben: But as an average, I think you will typically see higher, just because property values are somewhat lower outside of Toronto.
Davelle: Right. For now, anyways.
Ben: For now, yeah.
Davelle: So, for the millennials that aren’t using help from family, what would you say, I guess a lot of those people are taking on some really large mortgages?
Ben: Relatively large, so usually we … When you’ve got first-time home buyers, particularly millennials, they’re gonna opt for a high loan to value. So, with CMAC’s rules, you can put as little as five percent down. That does change when you go over 500,000, so I think we’ll speak to that a little bit later as well. But typically, most millennials are gonna want to put as little down as possible, just because, you had alluded in your first podcast about mortgage payments being considered forced savings. So about half of that payment is gonna go toward your equity anyways.
Ben: So they, their first step is really just getting into the market and the cheapest way to do that is put the five percent down.
Davelle: So, what are some of the largest mortgages that you’ve seen millennials taking on then, in this market?
Ben: It really depends. When Mom and Dad get involved and they’re willing to gift two or three or four hundred thousand dollars, there really is no limit in that regard, but if you’re looking, your typical, let’s say, 30-year-old earns about 60 to 70 thousand dollars a year, and then Mom and Dad are helping out, their price ranges usually are around 450 to 500 thousand, and then whatever savings they can come up with themselves with their parents. Usually they’re buying with between 5 and 10% down.
Davelle: And so, for the people who aren’t getting help from their parents, what kind of mortgages would you say that those people are taking on?
Ben: Oh, right, sorry.
Davelle: That’s okay.
Ben: In that case, their mortgages are a little bit lower, but still around the same price range. We, as a generation, are surprisingly good at saving. The problem is that it’s more intimidating to take that plunge which is why you’re seeing lower, I’d say lower participation from people that aren’t using their parents.
Davelle: Ah, gotcha. So then, for example, I mean, a lot of the houses in Toronto are really over a million dollars.
Davelle: So, do you see millennials buying some of those houses, like, once they sort of couple off? Are some of those millennials buying those kinds of houses, or are those houses out of reach for most millennials?
Ben: I’d say very rarely do you see millennials buying detached or higher-end semi-detached homes in the downtown core. Usually when you’ve got someone under 35, their price range is much lower than a million dollars, which automatically prices them out of there.
Ben: So they’re either looking at condos in the city or somewhere out of the core, they’re looking at investment properties or, sort of, semi-detached.
Davelle: Perfect, that makes sense. And then also, in Canadian Business, they had another stat about … They said about 40% of millennials are actually buying pre-construction homes, condos, those kinds of things. Is that something that you’re noticing as well in your business?
Ben: It does happen a lot. We don’t necessarily advise to go that route. There’s nothing wrong with buying pre-construction, per se. It’s just, when you’ve got millennials that have already come so far and they’re able to buy now, what we find they’re typically doing is just trying to get into the market as quickly as possible, so our clientele typically doesn’t go for new construction as often, but I can definitely see the motivation there. I mean, we are the new and shiny generation, so I can see why resale isn’t as appealing to them. But we’re also the instant gratification generation, so to wait a year and a half or two years for your condo, it’s just not that appetizing.
Davelle: Yeah, it’s funny, and I was about to say, I’ve certainly noticed it with some of the millennial clients that I’ve worked with, that they do tend to want things now as opposed to starting small and building up. In my generation it was, you know what? Let me start off with something small that I can afford, and over time, over 20, 30, whatever years, I will take my time to move up in the market. But I do generally notice that a lot of millennials now, they want what’s shiny and new and they want it right now. They don’t want to wait. So, I think that’s unfortunate because I think there is something to be said for just taking your time, starting small, and sort of building a base and gradually taking on more debt versus getting it all right now and making it shiny and new.
Ben: I completely agree. And another piece of advice when it comes to new builds as well is that if you are taking on that type of liability, we know in today’s market with today’s lending guidelines that you can afford to do this. But if you’re banking on a year and a half or two years from now, if for whatever reason, minimum down payments change or lending guidelines change, you do leave yourself a little bit exposed that for whatever reason you might not be able to quality then, or it’s just gonna be that much more cost prohibitive.
Davelle: Yeah, that makes sense. Absolutely, for sure. And I guess you can’t really sorta tell, are those millennials sort of more urban focused or suburban focused?
Ben: Well, I’d say, when it comes to buying new build, they’re almost always more urban focused. So, we very rarely see millennials that are buying new build housing projects in sort of the suburbs. Those are typically for a slightly older generation, more developed families, I’d say. And the new build cohort is a very specific type of millennial buyer.
Davelle: And who would you say that that specific type of millennial buyer is, then?
Ben: It’s gonna be the people that are more into the trendy neighborhoods. If I were to profile them, I’d say maybe somebody that was renting in the Entertainment District or CityPlace or Liberty Village prior to that. It’s just, it’s the lifestyle they’ve more become accustomed to, and there’s nothing wrong with that. It’s just that’s, it’s more the type of person you see.
Davelle: And then what about the resale market, in terms of millennials? Are you noticing that they are more urban versus suburban, or?
Ben: We actually kind of see a mix of everything. By the time millennials are willing to go into the resale market, whether it be a small condo or a single family home, it does take a little bit of modesty to go into a resale property. So by that point, it’s more that they’ve been fully prepared for that. They’re acknowledging that there’s gonna be maybe some ugly paint on the walls or something that needs to be changed with it, but they’re making a wiser and more informed decision at that point.
Davelle: And so, on the resale front, if a millennial is buying one of those homes that needs a little bit of work, can they get some money from the bank to help them, like one of those purchase plus improvement mortgages? How are those with millennials?
Ben: They’re actually quite popular. So, the way the purchase plus program works is that it allows you to essentially gross up the value of the property a little bit, and then borrow against that future value. So, once you move in, if you need to change windows, doors, floors, anything like that that’s really just gonna spruce up the place, we can include that in the mortgage financing. It does have its limitations, though. Some people hear about this program and they get very excited to blow out the back of the house or add a second story and do $500,000 in renovations. It doesn’t quite work like that. It’s more for minor renos. But if you’re looking in a more compet-, or rather, in a less competitive space, or if you’re just looking to fix a little something here and there to make it more your home, it’s a great program to use.
Davelle: So, could somebody renovate a kitchen or a bathroom using the purchase plus improvements?
Ben: Absolutely. The only thing that they’re not allowed to do with that is any removable assets. So, if you do renovate the kitchen, you wouldn’t be able to include any of the stove, the fridge, or anything like that. No hot tubs or landscaping or anything, but for permanent fixtures and improvements that are genuinely gonna improve the value of the property, it’s absolutely allowed.
Davelle: Cool. That’s awesome, that’s great. And then what about construction financing? Do millennials tend to take those kinds of things on, or that’s for another generation?
Ben: Construction financing is a bit of a different animal. You’re going to different parts of the bank at that point. They’re usually assessed on an individual case-by-case basis and the rates can be different, the lending fees can be different, so it’s more taken on by people who are more seasoned in purchasing real estate and a little bit more ambitious. It depends on the scope of the work as well. So, if you’re just looking to blow out a bedroom and turn it into a bathroom, that could potentially fall under the purchase plus improvement program. But if you are planning to completely gut a house, take it down to brick and mortar, then that’s more the construction financing end of things and it’s a very, very specific type of financing that people usually prepare for months in advance.
Davelle: Got it. Yeah, that definitely makes a lot of sense, for sure. And anything else, any other sort of trends you’re noticing with your friends or clients in sort of that millennial age group when it comes to mortgages?
Ben: I find that they’re very intimidated and it’s almost as though they don’t want to know what they don’t know. People my age are a little bit afraid to hear what their credit score is or to find out that they might not be able to afford what they want. Usually what I try to do to advocate against that is just say, let’s take a snapshot of where you are today. If your credit’s bad, if you made those bad decisions when you were in university and didn’t pay off specific cards or anything, or if you’re not making the money you thought you’d be making by now, that’s fine. But at least we can better prepare so if you weren’t planning to buy for another three years, you’re not wasting those three years.
Davelle: Yeah, that makes a lot of sense. Definitely, for sure. And then anything else? I mean, you’ve got a webpage that is for millennials.
Ben: That’s right.
Davelle: Called Millennial Mortgage. Actually, not really a webpage, but you have a Facebook group page called Millennial Mortgage. Are there questions that are coming to you on your Facebook page that millennials are sort of really asking you these days?
Ben: To a certain extent. So that actually originated as just an Instagram account that I made for fun because some friends of mine were saying that you can’t make mortgages interesting with pictures. I still don’t know if you can, but I’m trying.
But what I’m noticing though is it is garnering attention from millennials faster than I thought it would. We’ve got a pretty good audience with it so far, and the main question that we get is, you know, “I’m paid hourly, can I afford to do this?” Or, “I’m planning to become an entrepreneur. Can self-employed people not get mortgages?” And so, it’s not so much that they’re asking questions specific to them. They’re more just confirming or trying to disprove a lot of the myths that are out there, that their parents have been telling them or slightly older generations have said. So, what I’m actually trying to do over the next few months is a campaign to just dispel a lot of the myths that people hear, such as having to buy with 20% down which isn’t true, and the fact that self-employed people can’t get mortgages. I just want to clear the air on certain issues like that, but it seems that it really is on millennials’ minds. They just didn’t really have an avenue to explore it or to find out more about it.
Davelle: Interesting. And actually, to that note about the self-employed people. I mean, do you want to just kinda tell us, walk us through a little bit. What happens to someone who’s self-employed trying to get a mortgage approval versus someone who is a salaried employee?
Ben: For sure. So any time that your income is variable, so even if you are gainfully employed, if it’s commissioned, if you’re using overtime hours, performance bonus, anything like that and especially if you’re self-employed and entrepreneurial. The banks are gonna want to see a minimum two year average of your, what’s called your line 150 income. So, the income that you’re actually claiming after all write-offs to the banks. So, what they do is, or the reason for that, is more just to make sure that there is some sort of consistency because whenever you have a variable income, you could have a very good year and then a very bad year, and the banks don’t want to judge you based on either of those. They want to make sure they’ve got an idea of what your lifestyle really can hold.
So we want to make sure that your taxes are up-to-date, that you have been doing this for a minimum of two tax years, not just two calendar years. And even if the income comes in a little bit light, there are certain options available. So we do have lenders that would allow for what’s called a stated income deal. They allow us to gross up some of the income that you use just because your lifestyle is obviously a little different than what you see on paper, because self-employed individuals try to net it down as low as possible to avoid paying high taxes.
Davelle: Got it. And so when they say that they can gross up the income, what are we talking about? 10, 15, 50%? How much?
Ben: It’s more gonna vary based on the client, the bank we take them to, and then the property. Some programs allow us to gross it up by 15%, some up to 50%, and then there’s other programs where, if they show, let’s say, $19,000 on paper, we can still claim 90,000 as long as it’s realistic. So, you’re not gonna see a taxi driver or an Uber driver that makes $800,000 a year, but you are gonna see realistically a contractor who netted all of his expenses down to 20,000 and he needed 85,000 to quality.
Davelle: Right. Now, on the renting front, have you noticed that quite a few of your friends obviously are still renting because the market in Toronto is so expensive for them? And do you see them as long-term renters? Like, do you think that there are some people there that unfortunately will never, ever be able to buy something because the market’s so expensive?
Ben: I do see a lot of my generation renting. A lot of my friends in the area rent. It’s more that they’re trying to get the lifestyle ahead of the time, or rather, a little bit ahead of time. What I find though is, when you’re in a market like Toronto where rent can exceed, 18, 19 or 2,000 dollars a month, it doesn’t really leave a lot of room for savings for a down payment. And when I was first looking to come down to the city, I found that the rent on some of these places was larger than a mortgage payment. So it’s almost wiser … I mean, take it with a grain of salt and look at it at a case-by-case basis, but it’s almost wiser to purchase some real estate as opposed to paying rent for some others.
Ben: It really just comes down to the individual, what their saving habits look like, and what lifestyle they can afford and what lifestyle they want.
Davelle: Yeah, absolutely. Now, do you see people getting creative in terms of, maybe, let’s say, renting a house and trying to sort of apportion off a different room so at least that way they can get their rent down, so that they can try to save for a home later on?
Ben: You know, to a certain extent. When you’re dealing with leasing a house, the type of clientele that go that route are usually a little bit more of an established family unit, so they don’t typically want to have strangers living in the third bedroom or anything like that. And so my generation mostly, they try to stick to the condo market, I think. They’re definitely getting creative, though. So a new trend that’s emerged lately, and I think you can speak to this as well, is cooperative purchasing.
Ben: So, they find that they can only afford, let’s say, 300,000 but their friend can also afford 300,000. They’re getting together and they’re gonna push for a $600,000 purchase.
Davelle: Yeah, absolutely. I mean, I’ve certainly been chatting with a lot of clients about, yeah, maybe they buy a duplex together and that way one person has one apartment, somebody else has another apartment, and then that way, they could certainly get a foothold into the market.
Ben: Exactly. So, we definitely are resourceful in working around the high rents in Toronto makes it a little bit difficult, but we’re still able to do it.
Davelle: Yeah, absolutely. I mean, are there, is there a segment of millennials that kinda think, oh forget it, they just won’t ever own and so they only will rent? Like, are there some people that sort of feel beat up by that prospect and decide that, you know what, they’re just going to be forever renters? Or does everybody still have hope?
Ben: Well, it is fairly discouraging to see that a small house in Toronto can go for over a million dollars. And then, it’s just going to appreciate at 16% per year from here.
Ben: At the same time, though, if people are hell-bent on living in the city, I find that they’re getting a little bit more resourceful. Whereas for people who are just quick to throw their hands up and say, you know what, I can’t afford to do this, they’re not necessarily throwing the towel in, but they are now sort of looking in the outskirts. So, I’ve got a lot of friends that have bought down closer towards London or more out towards Oshawa, Bowmanville, areas like that. So they’re never saying no, because we really do as a generation want to own real estate.
Davelle: Mm-hmm (affirmative).
Ben: It’s just we’re having to be a little bit more realistic in our expectations, or a little bit more disciplined in how we’re gonna get what we want.
Davelle: And are those same people commuting then, back into the city for work?
Ben: Some of them are. I don’t envy them, but some of them definitely are.
Davelle: Right, absolutely. ‘Cause what part of the city do you live in?
Ben: So, I live in the St. Lawrence Market.
Davelle: And do you, you’re saying you rent, you don’t own, right?
Ben: No, I actually, when I came down, I found that rent was so, it was so high it just didn’t make sense to go that route.
Ben: And so, for just a few extra hundred dollars a month, my mortgage payment allows me to live here. So, I bought back in 2014.
Davelle: Oh, wow. Oh my god, that’s amazing! That’s great.
Ben: Thank you.
Davelle: And so, are you in a one or a two-bedroom?
Ben: I’m in a one plus one, which is glorified one-bedroom. But I’ve got the space to myself, and at least there is that other rental income capability if I wanted to. But I made sure that I made a wise investment because it’s not just a matter buying something where the numbers are gonna make sense. You want to make sure that it’s the actual building makes sense and the actual location makes sense as well.
Davelle: Yeah, absolutely. For sure, definitely, and I certainly really like the St. Lawrence Market area. I actually own an investment condo in that area myself.
Ben: Oh, fantastic.
Davelle: Because I think it’s such a great part of the city.
Ben: Yeah, I agree. My commute to work takes me four minutes.
Davelle: Hey, that’s good. That’s all about the short commute. I mean one of the things that they were saying is that because a lot of the millennials want to live and work downtown, they’ve certainly started building a lot more commercial buildings in the city so that companies can have their offices downtown because that’s where the bulk of people want to work.
Ben: That’s right.
Davelle: They don’t want to be out in the suburbs, so.
Davelle: Yeah, makes sense.
Ben: With that though, what you’re seeing is a lot of these, I call them McCondos, so quick to go up. Very, I don’t want to say poorly made, but just quickly made. And that’s the difference between spending $300,000 on a condo that’s going to appreciate at 2% per year, versus 300 on a condo that’s going to appreciate at five or six or seven.
Davelle: Yeah, absolutely. That definitely makes a lot of sense, for sure. Because, you know, it is all about picking the right builder and the right location because some buildings certainly appreciate faster than others and I find that each condo building is almost like a little microcosm. It’s not even to say that all condos will return a certain percentage, but each building has its own percentage based on what it’s truly like to be in that building, what the amenities are like or not like, and how much the maintenance fees are and the reserve fund, but there’s a lot that goes into sort of developing the value of a particular condo unit in a building, for sure.
Davelle: Absolutely. Anything else you want to share with the audience today, Ben?
Ben: Well, if they’re on any social network, so Facebook, Instagram, or Twitter, they can take a look at Millennial Mortgage. It’s just a quick passive resource for them to get some information and if they have any questions, they’re always free to reach out. Otherwise, I think the best bit of information for millennials is just don’t get discouraged. It really is possible to do what you’re looking to do here and one of the worst mistakes that you can make is just hoping for the best and putting things off, when you have an opportunity just to sit down, see where you are now, and then form a plan from there.
Davelle: Perfect! That sounds great. That’s awesome advice, Ben.
Thanks again for joining us today for some Toronto real estate market insights. Once again, you can reach out at Davelle@bosleyrealestate.com or on Twitter @DavelleMorrison. Thanks again for listening and please join us for another podcast.